Domestic Rates

I wish to draw attention to the urgent need for the examination of alternatives to domestic rates. The Domestic Rates (Abolition) Bill, which I introduced into the House in February, and which I urged the Government to find time for this Session, was intended to assist in carrying out what has been a firm strand in Conservative thinking for many years.

In 1974, the party manifesto contained a pledge that
within the normal lifetime of a Parliament we shall abolish the domestic rating system and replace it by taxes more broadly based and related to people's ability to pay.
In 1979, this commitment understandably became
cutting income tax must take priority for the time being over the abolition of the domestic rating system.
In the view of many of us on the Government Benches, and particularly of my 11 hon. Friends, who co-sponsored that Bill—the Members for Newark (Mr. Alexander), Birmingham, Yardley (Mr. Bevan), Gravesend (Mr. Brinton), Luton, West (Mr. Carlisle), Chorley (Mr. Dover), Dartford (Mr. Dunn), Portsmouth, North (Mr. Griffiths), The Wrekin (Mr. Hawksley), Meriden (Mr. Mills), Rugby (Mr. Pawsey), and Aldridge-Brownhills (Mr. Shepherd)—the time has come to start movement in the direction of fulfilling this obligation to the electorate, and, as part of that movement, the examination of the alternatives available to domestic rating is imperative. I also commend to the Government the pamphlet "The Great Rate Debate" by my hon. Friend the Member for Lichfield and Tamworth (Mr. Heddle) as a helpful contribution to such studies.

It is sad that there is no Member in the Chamber tonight representing either the Liberal Party or the Labour Party, or, indeed, the new brand of Social Democrats. So much for their interest in the basic subject of domestic rating and its abolition.

The system of rating has a long history, predating as it does the Elizabethan Poor Relief Act of 1601—the legislation that provided the foundation for the modern form of local property taxation. Since that time various changes have been sanctioned by Parliament until the General Rate Act 1967 replaced and consolidated most of the former statute law relating to rates, and subsequently further exemptions and rate rebate schemes were introduced.

However, despite the passage of time, or perhaps because of it, we are left with the anachronism of domestic rates. Such an anachronism must be removed by finding a realistic alternative. To the vast majority of people—this is certainly reflected in my own constituency—the domestic rating system is iniquitous, being as archaic as it is manifestly unfair. I ask hon. Members to reflect upon the overwhelming desire of their fellow citizens that it should be abolished.

There has been growing concern regarding the continuation of this means of raising finance—a concern rapidly deepening as local authorities in far too many cases are still not prepared adequately to control their own finances. Such a consensus provides the opportunity to
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break with this outmoded method of gathering revenue and at the same time it signals the vital requirement of examining alternative options to domestic rates.

There are many reasons to be critical of domestic rates, all of which need studying if alternatives are to be considered. Perhaps the most important, as my right hon. Friend the Prime Minister has succinctly put it, is that
rates are unfair because they are not related to the ability to pay.
I am sure that, as is so often the case, many of my hon. Friends will wholeheartedly agree with the Prime Minister. Many hon. Members are all too well aware of the inherent problems that occur when similar houses have similar rate bills, irrespective of the number of occupants using the services provided by the local council.

The next most important criticism revolves round the actual rateable values themselves. Infrequent valuations mean that the system is operating on out-of-date information for most of the time. But worse is the fact that they are based on hypothetical rental evidence, with all the inconsistencies that that is bound to engender.

Further arguments against domestic rates are legion. Rates are paid by fewer than half of those who vote in local government elections. Rates result in householders shouldering a disproportionate share of the burden of paying for local finances. Rates of themselves are inadequate to finance local councils. Rates are regressive, because they bear most heavily on those with the lowest incomes. Rates assessments are arbitary and unfair, because they often vary widely between seemingly similar houses. Rates do not produce the same financial resources for local authorities that have similar needs. Rates are an "inelastic" source of revenue, because they are not immediately responsive to changes in general price levels. And so the indictment goes on and on, adding weight to the inevitable conclusion that action must be taken now to initiate an examination of alternatives to domestic. rates.

A number of proposals have been put forward as possible replacements for the domestic rating system. Amongst the most popular that have been canvassed by those advocating continuing local accountability are a local poll tax, a local income tax, a local sales tax and a local payroll tax. Other suggestions have included straightforward national funding from taxation, rates based on a capital valuation, reducing the number of services paid for out of rates, and various combinations of differing methods of finance raising, all of which require thorough and speedy examination.

If domestic rates are to be abolished, which should be sooner rather than later, I call upon the Government to take rapid strides in examining these alternatives and in providing guidance. If domestic rates are to be abolished I call upon the Government to bring forward, with all due speed, a Green Paper, at the very least, to ensure that the necessary process of consultation is embarked upon without delay. If domestic rates are to be abolished I call upon the Government to indicate their determination to proceed with appropriate legislation at the earliest possible time.

I am sure that the House is grateful to my hon. Friend the Member for Welwyn and Hatfield (Mr. Murphy) for raising such a crucial subject, and, if I may presume to say it, the fact that an inordinate number of my hon. Friends stayed to
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listen to him illustrates and reinforces the deep-seated feeling of many hon. Members, at least on the Government Benches, about the iniquities of our present domestic rating system.

I believe that my hon. Friend and I are two of a growing number of hon. Members who are convinced that the rating system needs to be replaced. I would extend that to the whole of the rating system rather than confine it, as my hon. Friend has done tonight, to the domestic element, because I believe—and my hon. Friend spelt it out in eloquent terms—that the system is unfair, illogical and archaic.

I want to reinforce two of the telling points that my hon. Friend made. First, although the rate support grant represents, in round terms, about 60 per cent. of total local government revenue, and although recently—in relative terms—a rate rebate scheme has been introduced to help those who find difficulty in paying this iniquitous impost, the fact is that those two measures have only marginally softened the injustice of the impost and have in no way removed it.

Secondly, I believe that the abolition of the rating system and its replacement is now a matter of urgency, if only because of the way in which some profligate Socialist councils have abused the system. They care naught for their ratepayers' interests and seemingly are determined merely to cock a snook at the Government. They find that the most convenient way of doing so is by spending more and more, irrespective of the needs of those who live in their communities.

I call in aid one statistic to reinforce this argument. Last year the rates revenue of all local councils added together came to £8,705 million. That is the estimated outturn that the Government have calculated. This year the Government calculate that it will be about £10,285 million. That is an increase of no less than 18.2 per cent., which is well above the rate of inflation that has taken place in the past year. However unfair the rating system was last year, it is that much more unfair this year.

My hon. Friend the Under-Secretary of State knows that I have been a persistent questioner of Ministers about the rating system. I understand only too well the problems of finding an adequate and revelant substitute. However, I hope that, at least as a first step, the Government will publish a consultation paper that sets out the options, with preferably their initial comments on each of them. If the Government do that—it may be that they come to the conclusion that the system should be amended rather than repealed, but I hope not, because I think that the force of logic is on our side—preferably before the Summer Recess, a national debate may ensue and it may be that despite the fact that there are no Opposition Members in their places a consensus will be found that crosses party political bounds on a substitute for what my hon. Friend and I have described as an iniquitous impost, by any standards.

I am grateful to my hon. Friend the Member for Welwyn and Hatfield (Mr. Murphy) for the opportunity of debating the rating system. The present state of the system is of great concern to all my right hon. and hon. Friends. It is curious that the Opposition parties, be they the Labour and Liberal
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Parties or the tentative SDP, all have similar grave concerns about the rating system yet do not find the time or the convenience to be present in the Chamber for this debate. It may be that their absence reflects on their involvement in these matters and their disdain for practical and concerned action in an area that concerns all my right hon. and hon. Friends.

Over the past two years we have been grateful for the attention given to this issue by the Department of the Environment. However, I have great reservations and concern about the practicalities that have been pursued. The argument in the DOE seems to have revolved on whether our first commitment is to reduce personal rates of taxation. It has been argued that after we have mastered that difficult and tendentious area of our national life we shall address ourselves to some form of remedy to the existing rating system.

When I was first elected to the House I was fortunate to come relatively high in the private Members' ballot. I tried to propose a Bill for the abolition of domestic rating in future to give the Government an opportunity to consider ways in which that could be effected. I do not think that we can view the rating system in isolation from direct taxation. They are one and the same thing. Those who pay rates are effectively paying taxes. In order to be talking about a reduction in our direct taxation of one form or another we must have a view of the rating system.

My anxiety and concern is that we have failed to do so for two years. My anxiety and concern is that despite the absence of the Social Democratic Party, the Liberal Party and the Labour Party, when' they come to the next election they will proclaim something that is part of our national inheritance. I am proud to be a member of a party whose leader, now Prime Minister, espoused the cause of the abolition of domestic rates. That is as recently as five or six years ago. Unfortunately, the question has moved wider. As we have seen the march of central Government and local authorities, we have also seen the burden imposed on local businesses. The challenge that confronts our economy today, for companies, is not so much the level of corporation tax, but the growing burden of the local authority rate.

What I want to hear from the Government and from my hon. Friend the Minister is not that they have tentative arrangements in the Department to look again at the well-tilled soil of rate reform. The history of the last 20 years is a review by various committees inspecting and evaluating ways in which to tackle the central problem, which is acting as a burden upon my electorate and the constituents of every hon. Member in a way that no one would have conceived just 20 years ago. It is not a marginal tax but a direct, heavy burden on business, employment, and, in the end, the international competitiveness of our nation.

Therefore, it behoves the Government to direct their attention, as part of the overall taxation of this country, to the way in which we determine local rates. I urge the Government not to talk about priorities of direct personal taxation but to take into account the fact that of the 35 million electors only 13 million pay rates. We already recognise that that is part of. our direct taxation system by the fact that there are rate rebates, as my hon. Friend the Member for Welwyn and Hatfield said. Surely that acknowledges the fact that it is part of our taxation burden.

I hope that when the Minister considers the matter he will give some indication that the Government will not
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have yet again a committee of wise men, dredging over the same information that is well known to every hon. Member and not unfamiliar to every ratepayer, but are purposefully detailing the way in which they are proposing to lessen the burden upon those unfortunate few who have to pay that tax. In that review of the personal situation, the Government should not discount or disregard the present burden on our employee-producing sector of the economy—small and large businesses—to whom we look to further the economic interests of the community at large.

I also congratulate my hon. Friend the Member for Welwyn and Hatfield (Mr. Murphy) on his initiative in introducing this Adjournment debate. I am particularly grateful to him for allowing me to enter the debate on his coat tails.

My hon. Friend properly described the present system of rating as being grossly unfair and iniquitous. He is entirely right in that description. The anomalies that are being created are drawing the whole system of local government increasingly into disrepute. I do not underestimate the difficulties that are inherent in discovering a new method of financing local government, but the effort should be made within the lifetime of this Parliament.

The problems of domestic ratepayers and of industry are increasing. They are now even spilling into the general area of water authorities. No hon. Member can seriously dispute that it is a ludicrous system that bases the water bill on the size of house that is occupied. That is nonsense. If local government is to remain, as I hope it will, it must have the right to raise its own revenue. It must decide on the size of its services and it must have the power to raise revenue for that purpose. However, the method must surely reflect people's ability to pay, and that is the greatest defect of the present system.

For even with the safety net of rate rebates, a great deal of unfairness exists. The system appears to select for greatest injustice the poorest and the oldest—one-parent families and old-age pensioners. The Opposition talk a great deal about those groups, yet the Opposition Benches are deserted tonight. Perhaps that is a comment on their concern for the elderly and one-parent families.

The system remains after years of protest only because it is a relatively cheap method of collection, which is a poor justification for maintaining a system that is outdated and unpopular. It should be buried under a mound of final rate demands, on the nearest town hall steps. RIP should mean not so much "Rest in Peace" as "Rates into Pulp."

I add my congratulations to my hon. Friend the Member for Welwyn and Hatfield (Mr. Murphy) on selecting this moment with impeccable skill. I also congratulate my hon. Friends the Members for Chipping Barnet (Mr. Chapman), for Aldridge-Brownhills (Mr. Shepherd) and for Rugby (Mr. Pawsey) on participating in the debate. It is noteworthy that many colleagues are here to lend their support to active discussion of the problem. I only wish that I could congratulate myself on the skill with which I can reply in the nine minutes that remain.

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There are certain points on which we agree, and I hope that I shall be able to deal with those in the time remaining. My hon. Friends are articulate and implacable opponents of the present rating system. There is no doubt about the way that it affects families and in particular the elderly and disadvantaged. There is plenty of evidence of that fact. Domestic rates have been a serviceable tax for many centuries, and they probably were at one time a fair method of local taxation—and we must remind ourselves that we are talking about local taxation. However, for some years they have been seen to contain many inequities. The rebate system removes only some, by providing relief akin to a tax allowance for up to about one-fifth of households at the lower end of the income scale, but there remain many unfairnesses between households of similar income paying dissimilar rate bills. All those problems are, of course, felt much more keenly in a period of rising rate bills. Industry and commerce—and my hon. Friend the Member for Aldridge-Brownhills was eloquent on this point—are much more sharply affected by rate burdens at such a time.

The Conservative Party is no recent convert to the cause of removing the unfairnesses. We have gone on record to that effect for a long time. Our previous manifesto was mentioned, in which we said that cutting income tax must take priority for the time being over abolition of the domestic rating system. However, that does not mean that thought is not being given to changes that may be made to the system. We are not holding things back simply because we are presently committed to tax cutting. 'The House knows that an important start was made in reducing income tax shortly after we took office, and that such reductions remain a primary aim. Action on domestic rating remains a clear objective, but it must be seen in the context of our other fiscal and economic aims.

In relation to local government, for instance, the overriding priority so far has been to tackle the root cause of high rate bills. My hon. Friends would do well to recall that reductions in the scale of expenditure may be a more effective way of easing the burden than altering the revenue base. Local authorities have been asked to reduce their spending this year to about 5½ per cent. below the level when we took office. Their co-operation in achieving that is something that we shall continue to pursue most vigorously, determined as we are that public sector spending should be at a level that the country can afford.

I believe that many local authorities and most councillors are, in the main, well aware of the constraints and the needs of the national economy. Their spending decisions are beginning to reflect this understanding. The changes made in Exchequer grant for current and future years will help. Block grant makes it more expensive for authorities to spend above a reasonable level and thus provides incentive for authorities to avoid excessive levels of spending. It is against this background that we have been examining a wide range of possible alternative sources of revenue.

To those who think that we are being slow, I would say that in many ways we are breaking new ground. It is often thought that the Layfield committee on local government finance, which reported in 1976, recommended the replacement of domestic rates by a local income tax—yet this is not so. What the committee actually suggested as one of two possible approaches was the addition of local income tax to domestic rating in order to reduce Exchequer grant. What this Government are doing is to explore
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options for replacing domestic rates completely; and any tax that is to become the sole source of local revenue for local authorities must be found to be not only fairer than rates by the people paying but also a practicable instrument of local revenue raising. It has to function smoothly in local authority budgeting; for example, it must encourage prudent taxation and expenditure by councils.

Let me say also that we want a widely acceptable reform of the rating system that will last. We are therefore right to study this matter carefully so that we can develop proposals that will stand the test of time.

We are, as I have said, examining all feasible alternatives, including the suggestion that the system itself should be retained but reformed—and I noted the ill will with which that suggestion was received by at least one of my hon. Friends—for example, with modifications to the basis of rateable value, or modifications so that liability for rates takes account of the number of earners or adults in a household. Some of these were considered by the Layfield committee; some have been put before us by other sources.

Let us not forget, however, that the yield from domestic rates in 1980–81 was £3.6 billion. The figure quoted by my hon. Friend the Member for Chipping Barnet referred to the total domestic and non-domestic rate income. However successful local authorities are in reducing expenditure, much of that revenue will continue to be needed to help fund an essential range of local services. The scope of the problem is considerable: to raise the required revenue entirely by means of a poll tax would equal £90 to £100 for each adult; 4p would need to be added to the standard rate of income tax; or, if an indirect tax were preferred, 4 or 5 per cent. would be added to VAT.

Each of these options, together with others such as a local sales tax, has its proponents, but each creates its own problems. I can illustrate this by reminding the House of what my right hon. Friend the Secretary of State said about the idea of a local income tax, recommended as an addition to rates by the Layfield committee. It is also an alternative source of revenue to which the right hon. Member for Manchester, Ardwick (Mr. Kaufman)—who is absent like all other Opposition right hon. and hon. Members—appears to have committed the Labour Party. Whilst it is a system with some attractions, the major difficulty is clear: all the efforts of my right hon. and learned Friend the Chancellor of the Exchequer in lowering national income tax levels could be put at the mercy of over-spending Labour authorities.

But let us look more closely at the examples, which have been mentioned. Domestic rates yielded £3.6 billion in 1980–81, and any new tax must be capable not only of producing a sufficient yield overall but of providing an independent source of income for each of the 521 main authorities in Great Britain; and, of course, the replacement of domestic rates raises wider issues about local government finance and the Government's taxation strategy—I take entirely what my hon. Friend the Member
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for Aldridge-Brownhills said about taxation being the name of the game—as well as having major economic effects, particularly on housing, on the retail price index, and on distribution of income.

All of the options which we have been looking at would have effects in some of these areas, some in all of them, and they will have to be considered most carefully. I have mentioned a local income tax. This option would certainly be more equitable than rates as it would increase the numbers bearing the tax from around 20 million to about 28 million and would mean that, where more than one member of a household was earning, a contribution more appropriate to the use made of services provided by local authorities would be made.

On the other hand, apart from the effect on taxation levels of excessive spending by local authorities which I have already mentioned, there would be administrative difficulties in introducing a form of local income tax.

A local sales tax, something which operates in the United States, also has its attractions. With this, the whole population of some 54 million would contribute towards local services by payment of a tax on goods bought locally at a level set by local authorities—which might be 4 or 5 per cent. There might be similar administrative difficulties in introducing such a tax, and it would involve burdens on shopkeepers and other traders who already have to deal with value added tax. Indeed, the interaction between a local sales tax and VAT generally would have to be examined closely.

With a poll tax, the number of people making a contribution would be around 40 million if it were levied on all adults. Local authorities would be able to predict the yield from such a tax reasonably accurately—provided that problems of registration could be overcome—and it might be possible to link it to ability to pay by allowing for a rebate scheme. On the other hand, I must warn my hon. Friend the Member for Welwyn and Hatfield that the problem of registration might prove difficult; it is unclear whether the electoral roll could be used, or whether it would be sufficiently accurate if it could. The point about accuracy and updating the system was an important aspect of my hon. Friend's contribution. Finally, if the whole of the revenue currently provided by rates were to be raised by means of a poll tax, the amount levied on each adult would have to be around £90, or £100 if a rebate scheme were to be introduced.

Every alternative must be looked at closely within the framework of local government finance. Excessively high rate bills flow, in the main, from irresponsible expenditure plans, and we must deal with that. This is the central dilemma.

I cannot say yet when a full announcement will be made, but I hope that my right hon. Friend will have something to say about this tomorrow. However, we are concerned that the right—

§The Question having been proposed after Ten o'clock and the debate having continued for half an hour, MR. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.